What does the future hold for new entrants to the market?
The last two years have seen a slew of new entrants into the market, buoyed with startup capital and dreams of success in the re/insurance sectors.
Unlike previous moments when new entrants have arrived and left quickly, the class of 2020 seem to possess an almost adhesive-like staying power. To discuss this, Intelligent Insurer invited Bill Cooper, managing director and head of advisory capital at TigerRisk Partners, to the Re/insurance Lounge, the on-demand platform for interviews and panel discussions with industry leaders.
Cooper said that one of the reasons for this was simple economics. “There’s still an appetite for growth in the sector,” he explained, “along with continued growth in rates and opportunities for firms to grow and develop. All of that leads to investor appetite.”
“We’ll see some listings of companies, plus some consolidation further down the track.” Bill Cooper, TigerRisk Partners
Cyclic effects
As to why this has happened across 2020 and 2021, Cooper says the COVID-19 pandemic had little to do with it, and that the cycle began to turn for different reasons.
“It’s now clear that the cycle began to turn early last year when the pandemic started to bite. Since that time, around $14 billion worth of capital has come into the P&C space,” he said.
“This is a cyclical industry, with profitability and returns going up and down. The cycles are never quite the same, and every version of them is slightly different. Until about 18 months ago, the returns in the P&C space were, frankly, not very good.
“They’d been deteriorating for quite a long time, exacerbated by catastrophes, losses, and so on. Interest rates were low and investor appetite was therefore not there to raise new capital in the space, even if it was a sensible idea at the beginning.”
But where capital has often washed into the sector and then swiftly gone back out, Cooper thought that the current successful run is destined to continue.
“Investor appetite is not sated, and there are a couple of reasons for that. One is that there were investors who wanted to back deals last year but couldn’t. They were underbidding or the deals they wanted to back didn’t happen for some reason. A few high-profile investors wanted to be in the space as returns looked as though they were going to be good, but they didn’t find the right opportunity.”
The other thing, Cooper added, is the shape of the cycle. He explained: “If you look back to the cycles of 2001 and 2005, both of these brought sharp rises in premium rates and return opportunities, but you had to get in quickly in order to take advantage. It’s a bit different this time.
“We think that is because of a hardening in casualty-related lines, particularly in the US. The rising cycle will probably go on for a bit longer here so there is still some opportunity to build profitable growth.”
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“It’s harder for those not so well-known to establish themselves.”
Size matters
Any future new startups, Cooper says, would be smaller and more niche, possibly focused on specific segments or geographies.
He had some words of warning. “History is a guide, but not an answer. Most of the recent startups and scale-ups have been backed by private investor capital. The thing about that is that, at some stage, those investors will need to get out and get their returns. So we’ll probably see a range of transactions.
“Past cycles have shown us that most of the firms have been initial public offerings, so we’ll see some listings of companies, plus some consolidation further down the track,” he noted.
Raising capital within the UK has shifted significantly in recent years. Reinsurer capital, he said, had been a main source of funding for those in the Lloyd’s of London syndicates, along with bank capital.
When it comes to reinsurers, Cooper said, many of them had pulled out recently or, at the least, drawn back.
“In some cases it’s because the returns weren’t there for them. And in others, it’s because they’ve wanted to concentrate on their core businesses. That’s required some of the firms who were reliant on that capital to raise from other sources, including private equity,” he explained.
“There also used to be more bank financing. It’s still significant, but it started to change through regulatory pressure. Under Solvency II, the market is required to have less than 50 percent of its financing in tier 2. It’s had to reduce reliance on that, so it’s led to a recourse to different types of financing such as debt from public and private markets.”
This interview was conducted at the start of renewal season with the world, if not shutdown entirely, still restricted in its movements. Cooper, for one, misses a lot of the old face-to-face world.
“There have been a few impacts from that,” he said. “Those raising capital have tended to be the well-known ones because they’re easier to back. It’s harder for those not so well-known to establish themselves.
“And with the people backing the startups and scale-ups, there were prior relationships in many cases.”
As the renewal season starts again, mostly online, it will be interesting to see where the rest of 2021 and 2022 take the industry and its new entrants.
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